Size Matters: Why Managers Should Pursue Corporate Growth, Even at the Expense of Shareholder Value

The fact that managers pursue corporate growth and diversification as a primary objective, and that this objective might be contrary to other corporate goals, is well established. For example, Adams and Brock in The Bigness Complex note that “America’s corporate giants have not performed well over the last fifteen years...Bigness has not delivered the goods, and thus fact is no longer a secret” (1986, p. xi). Recent evidence to support this claim is provided in an extensive empirical study by Ramezani, Soenen, and Jung who analyze several thousand firms over a period of eleven years from 1990 through 2000. They define corporate growth in terms of the growth rate in sales, and shareholder value in terms of both economic value added (EVA) and abnormal stock-market returns. (These definitions of corporate growth and shareholder value are used throughout this paper.) They conclude that “although the corporate profitability measures generally rise with earnings and sales growth, an optimal point exists beyond which further growth and sales growth, an optimal point exists beyond which further growth destroys shareholder value...” (2002, p. 56). They note that many firms go beyond this optimal point and conclude that “corporate managers need to abandon the habit of blindly increasing company size” (p. 65).